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Peering Over The Edge, and a Retreat to Basic Principles

“You have to throw a lot against the wall and see what sticks before you can do an 80/20 analysis.”

Time to explain the two things I’ve so far “thrown against the wall”, what I’ve learned, and why I’ve determined at least one more projectile aimed at said wall is probably warranted?

For the last three weeks, it’s been full speed ahead on two muse ideas. (“Muse”, for non-cultists, refers to an income-generating retail side-business requiring minimal upkeep.) The first I’ll describe in detail because it’s informational and utilizes a hard-won area of expertise. To describe the second, I’ll use the same generalities I’ve used with people I haven’t asked to sign non-disclosure agreements.

It’s the second muse, a specially shoe for a niche I belong to, that’s so far caused me the most headache. It’s also the most useful filter through which to examine the fundamental question of this blog – if it’s easy why isn’t everyone doing it? – and a related, secondary question that hit me today – what’s the difference between a muse and a traditional business.

Here, stage-by-stage, are answers to the first question:

-Inventing and testing a niche product idea is the easy part.

To review, the concept in Four Hour Work Week is once you have a couple of muse ideas, you use google Adwords – the sponsored search results you often see at the top of a search – to both test and prime the market for your ideas. Ideally, you would create ads for your products, create sites for those that test well (above a certain “click through rate”), then order product once you’re generating “orders” (in the form of people agreeing to the price, giving you their contact info, minus any credit card info – the collection of which under false pretenses is illegal – then clicking “buy now” and seeing a page telling them product is on back order) on your site. One month of negative cash flow while you recoup your investment, then onto profitability. Simple. Elegant.

In practice, of course, it’s hilariously more complicated. But explaining the distance between the theory and the practice is the purpose of this blog. Anyway, I went through some ridiculous “rough drafts” that google Adwords quickly disabused me of. Tim Ferriss is right that Adwords is a great tool to test and eliminate many a bad idea before settling on a couple of winners. I squealed with delight upon waking up and discovering that both of my ideas were generating healthy clicks, and the click-through rate (the percentage of people who see the ad who click through to the “website”) for the shoe was especially robust.

Two immediate issues.

-First, my average cost-per-click was around a dollar. That doesn’t seem bad – a dollar on advertising for a product that retails for many times that, until you remember standard conversion rates. (Google “px method”.) At 1.5% “click-through”, that means that 3 of every 200 people who see my ad actually click through to the site. So $200 for advertising, $300 in revenue assuming a $100 sticker price? Sound bad yet? Then remember that only 1-2% of the customers who visit your site actually *buy*. So for every 2000 people who see your ad, 30 visit your site, and fewer than 1 actually buy. $2000 for advertising, for maybe one sale of $100. As the scale of the failure of this first real-world test case dawned on me, I had to chuckle.

Anyway, back to the source…

Rereading the pertinent FHWW chapter, I discovered I’m supposed to aim for 1-2 *cents* cost-per-click. That would indeed make the model work – only $20 in advertising per $100 in revenue, with worst-case-scenario conversion rates. But none of the search terms I chose are anywhere *near* that cheap. They either had practically negligible search traffic, or averaged around a dollar per click. Then it hit me. FHWW was written in 2007. Is it possible that in the last 5 years adwords has gotten 50-100 times more expensive? Bingo. A little googling, and I found a chart detailing the inflation of Adwords costs. Further searching revealed a forum on fourhourworkweek.com where I discovered the phenomenon has a name: the “muse killer.”

Haha. So the low, loooooow hanging fruit has been picked. Jeez, iMAGine how easy it must have been back in 2007. I’ll speak further about PPC (“pay-per-click”) in later posts.

Alright – with the first bit of disillusionment out of the way, I accepted that I would have to use slower, more organic methods to generate web traffic. The good news about such methods (grouped under the term SEO, or “search engine optimization”, by the experts) is they’re usually more enduring, and the conversion rate of people who make some effort to seek you out because of word-of-mouth is much higher than that for those clicking on a sponsored search result on a whim.

All the same, allowing my business time to grow organically would put leave no margin for error with the cash flow. I would need to tweak my supply chain minutely.

-Which brings me to the second issue: how in blazes was I supposed to source this product?

The book presented two case studies – a man who ended up reselling French sailor shirts and a woman who created an instructional DVD. No problem with the second – I have plans to create an instructional DVD with a unique approach to teaching music – but the shirts were an exceptional example for a few reasons. First, it was a pre existing product, eliminating the need to find designers and manufacturers, pay for retooling, order 1500 units up front, etc. Second, contrary to the usual issue existing products face – fierce competition – it just-so-happened no one else in the entire nation was sourcing and retailing genuine French sailor shirts.

Which brings us to the crux of difference number two between FHWW and the real world: the Venn diagram between easily-sourced and low-competition is vanishingly small. Expensive to advertise or no, my shoe fulfills the second condition of the sailor shirts – low or no competition for a niche market within which interest in the product is high – but not the first. No pre-existing foreign manufacturing infrastructure I can tap with as little as a phone call.

Nope. I’ve gotta design, prototype and manufacture my baby from scratch. I’ll describe in greater detail my gantt/flow chart in the next post, but suffice it to say you can either spend a lot of money up front for somebody to hold your hand from design to 1,500 units in your garage, with no guarantee of sales, or you can ask a million questions, hire people one-at-time, and figure the bulk of things out on your own.

So I’m back to basic principles, and throwing more “against the wall.” I should remember that manufacturing my own invention is *supposed* to be labor intensive and complex, and that it’s just one of three suggestions – resell an existing product, license a product, or invent one. I’m already experimenting with two inventions – one physical, one informational – maybe I should add one more projectile to my wall-collage: reselling an existing product. My adventures with this third category, plus still more detail on my other two, next post.